Parallel Imports Are Permitted for Genuine Goods
When foreign products are imported into a country, the typical scenario involves a domestic distributor or exclusive agent who signs a distribution contract. This agent handles necessary formalities, including permits and marketing, in exchange for a guarantee of exclusive import rights for a set period.
However, once the brand gains some recognition, direct overseas purchases, proxy purchases, and parallel imports by other companies often undermine the efforts of the exclusive distributor.
Unfortunately for these distributors, global legal frameworks generally permit parallel imports as long as the goods are genuine. The rationale is that since these goods originate from the legitimate trademark holder and there is no risk of misleading or confusing consumers about the source, it cannot be considered trademark infringement.
In terms of policy, parallel imports are encouraged to foster competition, broaden consumer choices, and help stabilize prices.
What Are Genuine Goods?
Genuine goods refer to products that have been legitimately distributed with a trademark by the rightful owner. To qualify as genuine, two conditions must be met:
- The product must share essentially the same origin as those sold in the domestic market.
- The product must have the same quality as the domestic version.
As long as these criteria are satisfied, parallel imports are legal.
The “same origin” condition means that the domestic and foreign trademark holders are either identical or have a close legal or economic relationship (e.g., a subsidiary owning at least 30% of the parent company’s stock or an authorized distribution agreement).
Parallel imports are not genuine in cases where the domestic and foreign trademark holders are entirely unrelated. For example, two different entities may independently own the same or similar trademarks in different countries due to the territorial nature of trademark rights. In such cases, importing the foreign product may infringe upon the domestic trademark holder’s rights.
The “same quality” condition applies when the product is manufactured by the foreign headquarters and imported without modification. However, if a domestic trademark licensee produces customized products for the local market, parallel imports may be restricted to protect the domestic licensee.
For example, K.SWISS had an exclusive licensee in Korea that manufactured and sold products specifically for the local market. Since the Korean products differed from those sold internationally, parallel imports were not allowed.
What About Counterfeit Goods?
Parallel imports are only legal for genuine goods. Counterfeit goods—those falsely claiming to be from the trademark owner—are never permitted.
Trademark Registration by Importers
There have been cases where exclusive importers registered trademarks in their own names, often with the approval of the foreign trademark owner. However, if the domestic trademark owner is essentially an importer acting on behalf of the foreign trademark owner, parallel imports cannot be blocked.
Korea’s Customs Administration has detailed guidelines that prevent misuse of trademark registration by importers seeking to hinder parallel imports.
Limitations on Parallel Importers
While parallel imports are legal, importers still face restrictions in their marketing and use of trademarks to prevent consumer confusion:
- Permitted Uses: Trademarks may appear on internal store signs, packaging, shopping bags, and promotional materials without causing legal issues.
- Prohibited Uses: Displaying the trademark on external store signs and business cards can be considered unfair competition if it misleads consumers into believing the importer is an official distributor or representative of the trademark owner.
In the Burberry case, a parallel importer placed the Burberry logo on their store sign and business cards, creating the false impression that they were an official distributor. The court ruled this to be an act of unfair competition.
Similarly, if a parallel importer re-packages and sells genuine goods, this could harm the trademark’s ability to guarantee product quality and origin, leading to trademark infringement.
Unfair Practices by Exclusive Distributors
The Fair Trade Commission (FTC) in Korea has issued guidelines identifying unfair trade practices related to parallel imports. Exclusive distributors are prohibited from obstructing parallel imports in ways that violate antitrust laws.
The following actions are considered unfair trade practices:
- Preventing supply: An exclusive distributor pressures the foreign trademark owner to stop supplying products to overseas suppliers associated with the parallel importer.
- Tracking and blocking purchases: The exclusive distributor uses product codes to trace the purchase channels of parallel imports and then pressures overseas suppliers to cease supply.
- Restricting sales: The distributor requires retailers to refrain from selling parallel imports as a condition for selling their own products.
- Discriminatory practices: Retailers who sell parallel imports may face worse prices or supply terms compared to others who comply with the distributor’s restrictions.
- Supply refusal: The distributor may terminate or refuse business relationships with retailers who handle parallel imports.
- Indirect restrictions: The distributor may prohibit wholesalers from supplying products to retailers who sell parallel imports.
These restrictions are deemed anticompetitive and unlawful under the Monopoly Regulation and Fair Trade Act. Parallel importers have legal grounds to challenge such practices.